(dissenting).
In December of 1980, Clark, who farms and ranches near Gettysburg, applied to the Department for LIEAP payments for himself, his wife, and his four children. The Department examined Clark’s 1979 tax return and determined that Clark was ineligible for assistance because his gross profits from farming, $23,904.91, exceeded the maximum income for eligibility for a family of six, which was $16,890.00. Clark contends that the Department’s refusal to permit him to deduct his 1979 farm expenses of $39,219.41 in calculating his household income violated federal regulations governing the LIEAP program and constituted a deni*193al of his right to equal protection of the law under the federal and state constitutions.
The Department’s program was created to administer funds designated by Congress to be used for energy assistance payments to eligible households within South Dakota. Eligible households, as defined in 45 CFR § 260.1 and § 260.150, include those households with incomes below the lower living standard established by the Bureau of Labor Statistics. States participating in LIEAP are required to submit a state plan that will comply with the applicable federal regulations. See 45 CFR § 260.15. The Department’s state plan measures farmers’ household income by using the gross profits figure of Schedule F of the previous year’s federal income tax return. Household income for non-self-employed individuals is defined as the household’s total gross income for the prior year.
Clark contends that the Department’s eligibility guidelines for farmers violates 45 CFR § 260.154(g), which provides in part that “[h]ouseholds eligible under the State’s plan and that are similarly situated with respect to energy costs, income and other considerations relevant to assistance under the Act, must receive similar amounts of assistance.” The essence of Clark’s complaint is that he was not allowed to deduct those expenses which he incurred in producing his total gross income, with the result that his gross farm profits as shown on his previous year’s federal income tax farm schedule bears no relationship to the income that he had available for household purposes.
Under attack in Naegle v. Dep’t of Social Services, 525 F.Supp. 1030 (1981), was that portion of the Department’s state plan which determined LIEAP income eligibility for farmers and other self-employed individuals by using the previous year’s federal income tax return and which determined the eligibility of other persons by annualiz-ing their previous 90 days’ income. The effect of annualizing quarterly income in Naegle was to deny energy assistance payments to the plaintiffs because their previous 90 days’ income, when multiplied by four, exceeded the income eligibility guideline, whereas their actual annual incomes for the previous year were below the guideline figure. The court held that the state plan constituted a manifest violation of 45 CFR § 160.154(g) inasmuch as the income-determining feature of the plan arbitrarily created several different classes of applicants and resulted in a distribution of benefits depending upon the class to which an applicant happened to belong.
In reaching this decision, the court stated, “Clearly, the state had considerable discretion to define income, and had it either used last year’s income tax forms for all applicants, or used the prior 90 days income multiplied by four for all applicants, there would have been little to challenge in the plan.” Naegle v. Dep’t of Social Services, supra, at 1032 (emphasis in original). The Department takes comfort in this language, arguing that inasmuch as the Department looks at the gross income of all applicants, Clark is being treated no differently from any other applicant. Although superficially persuasive, the Department’s argument will not withstand analysis, for as Judge Porter stated in Naegle, “To be in compliance with ... § 160.154(g), the state must treat all applicants equally, regardless of their source of income.” 525 F.Supp. at 1032.
I would hold that the Department violated the mandate of § 160.154(g) by disregarding those items of farm expense which had the effect of reducing Clark’s actual disposable household income to the point where he would have been similarly situated with other households eligible for LIEAP payments. I refer, of course, to those expenses that required actual cash outlays by Clark, in contrast to any deductions for depreciation, investment tax credits, or similar items. I do not share the fear that the adoption of eligibility guidelines which would put the self-employed in parity with those whose income is derived from salaries, investment earnings, or similar non-capitalized sources would shatter the constitutional precepts of justice, moderation, and frugality.